Sterling traders await today’s Bank of England meeting

The Pound received some much needed respite during the London trading session on Wednesday, recovering from its five-and-a-half year low against the US Dollar following a period of increasingly sour sentiment towards the currency.

Sterling traders will be paying close attention to this afternoon’s Bank of England meeting at midday. The overriding consensus is that the central bank will continue to take a dovish stance amid global economic headwinds and weak economic data. We agree with this view and do not expect any significant shift in stance from the MPC, with the vote likely to remain unchanged at 8-1 in favour of no action. This appears well priced in at present, meaning any hawkish surprises in the minutes could provide a boost for the Pound today.

Among G10 currencies, the Swiss Franc fared the worst yesterday, losing further ground against its major peers after comments from a Swiss National Bank member, Fritz Zurbruegg. Zurbruegg reiterated the SNB’s willingness to intervene in the foreign exchange market to manipulate the still “significantly overvalued” Franc.

Elsewhere, emerging market currencies across the board took a breather from their recent sell-off yesterday, with welcome positive trade data out of the Chinese economy leading to increased risk appetite. The Brazilian Real, Turkish Lira and Malaysian Ringgit all experienced sizable gains, while the South African Rand appreciated by the most of any currency in the world yesterday, now a massive 8% higher than its all-time record low reached over the weekend.

Major currencies in detail:

GBP

Sterling finally ended its run of almost exclusive depreciation so far in 2016, ending 0.2% higher against the US Dollar in the lead up to today’s Bank of England announcement.

There was no major economic data out of the UK yesterday, with the currency benefitting from a lack of negative surprises, such as those seen on Tuesday. Investors continue to push back their expectations for a Bank of England rate hike after the latest poor data.

All focus today will be on the Bank of England, which will be announcing its interest rate decision and monetary policy minutes at 12pm. We expect policymakers to reiterate no change in their existing stance. The minutes will likely touch on the increasing downside risks from abroad, the recent deterioration in oil prices and the downward effect these are both having on short term inflation expectations.

EUR

Despite some weak economic data, the Euro was well supported yesterday, increasing by 0.3%.

Industrial production in the Eurozone bucked its recent trend by surprising on the downside on Wednesday. Output in the industrial sector of the economy fell for the seventh month in 2015 by 0.7% in November. Production therefore grew by just 1.1% on a year previous, its lowest level since August, with unusually warm weather driving energy demand lower. However, investors almost completely overlooked the data that suggested economic growth could disappoint again in the fourth quarter, with the Euro barely moved as a result.

With little in the way of major economic indicator data out of the Eurozone today, attention will be firmly fixed on the release of the European Central Bank’s meeting accounts from its December monetary policy meeting at 12.30pm GMT.

USD

Wednesday proved to be a relatively disappointing trading session for the US Dollar, which ended 0.2% down against its major peers and lower versus the majority of emerging market currencies.

There was some encouraging housing data released yesterday which showed mortgage applications soared by 21.3% in the last week of December, the third highest jump all year.

Meanwhile, Federal Reserve member Eric Rosengren spoke yesterday, claiming that the widening divergence in monetary policy between the US and other major nations would likely increase volatility in the foreign exchange market. Rosengren also suggested that a global and US economic slowdown could force the Fed to hike more gradually than anticipated.

Economic data remains relatively light in the lead up to this Friday’s retail sales figures. Weekly jobless claims and the import/export price indexes will be the main focal point today in the US economy.